Bank of Montreal will buy Wisconsin's Marshall & Ilsley Corp bank for about $4.1 billion in an all-stock deal, the biggest in a series of Canadian financial sector deals to snap up weakened rivals.

Canada's fourth biggest bank said the deal would strengthen its position in the U.S. Midwest and more than double a branch network it operates through its Chicago-based Harris Bank subsidiary.

It will issue about C$800 million ($792 million) in new shares to help fund the deal.

That news drove BMO shares down 6.5 percent to C$58.02 on the Toronto Stock Exchange. Shares of takeover target M&I were up 20 percent at $6.95 in New York.

We're not rushing out and selling our stock, said David Cockfield, who oversees about C$300 million at MacNicol & Associates Asset Management Inc and who said the share dilution was the reason for the steep fall in the BMO stock price.

We do believe that there are probably some real deals out in the U.S. system and we hope that BMO has been able to identify one of them.

Canadian banks emerged from the global financial crisis in much better shape than many rivals and have been seeking growth opportunities abroad. The United States, with its still-fragile banking sector, is a key target.

Milwaukee-based M&I is the biggest bank in Wisconsin, and the deal would create the 15th-largest banking group by assets in the United States, BMO said.

M&I has 374 branches and about $52 billion in assets. BMO has 321 U.S. branches and $110 billion in assets.

Under the deal each M&I share will be exchanged for 0.1257 of a share of BMO.

Based on BMO's closing price of C$62.05 on the Toronto Stock Exchange on Thursday, that values M&I at $7.75 a share, a 33.9 percent premium on Thursday's New York market close.

The combination of Harris Bank and M&I is a perfect fit, BMO Financial Chief Executive Bill Downe told a conference call. It more than doubles the size of our branch footprint in the U.S., doubles our customer base in personal and commercial banking, gives us a meaningful market position in additional cities in the U.S. ... and it builds critical mass in our U.S. wealth management business.

BMO said the deal should generate annual cost savings of about C$250 million by the end of fiscal 2013.

BMO will also purchase M&I's Troubled Asset Relief Program preferred shares at par plus accrued interest, with full repayment to the U.S. Treasury just before the deal closes. It will also buy existing M&I warrants held by the U.S. Treasury.

M&I recently told investors it did not need to raise additional capital and was not under immediate pressure to repay its U.S. government bailout money, according to a Barclays Capital research report that noted the bank expected to be profitable by mid-2011.


Jeff Davis, bank analyst at boutique bank Guggenheim Partners, said U.S. financial sector deals are likely to pick up in 2011 unless the economy slides back into recession.

There are a lot of banks that are so severely challenged from an asset quality perspective, that is compounded by an environment ... depressed by weak real estate values and weak loan demands, that their ability to earn their way back to robustness is unlikely. But they're not going to fail, he said.

Those are the banks that I think Washington wants to go away. I'm not saying that's what happened with M&I, but I do think Washington wants weaker institutions to go away, or in effect to find buyers.

Canadian banks, dubbed the strongest in the world in a Bank of International Settlements report, have been active global buyers.

Royal Bank of Canada , Canada's biggest lender, last month bought the Hong Kong wealth management assets of Fortis Bank after snapping up British fund manager BlueBay Asset Management for about $1.5 billion.

No. 3 bank Bank of Nova Scotia recently bought South America banking operations from both Commerzbank AG and Royal Bank of Scotland , and is establishing a fixed-income rates desk in London.

No. 2 lender Toronto-Dominion Bank has been adding to its U.S. retail bank network.

($1=$1.01 Canadian)

(Additional reporting by Pav Jordan and Maria Aspan; Editing by Frank McGurty and Janet Guttsman)